Climate Positive

Desiree Fixler, Tim Mohin, and Erik Becker | Counting carbon and the credibility of "green" capital

Episode Summary

With the meteoric rise in net-zero commitments and “green” capital raises by corporations and financial institutions, investors and consumers are wondering if these statements are credible. Do “green” labels actually accelerate the flow of capital to companies and projects seeking to improve our climate future? In this episode, Chad Reed sits down with Desiree Fixler (former chief sustainability officer at DWS), Tim Mohin (chief sustainability officer at Persefoni), and Erik Becker (senior vice president of corporate development at Arcadia) at the GreenFin22 Conference in New York City to discuss why “green” financial products and labels are ineffective and why actually counting carbon levels the playing field for investors and consumers alike.

Episode Notes

With the meteoric rise in net-zero commitments and “green” capital raises by corporations and financial institutions, investors and consumers are wondering if these statements are credible. Do “green” labels actually accelerate the flow of capital to companies and projects seeking to improve our climate future? 

In this episode, Chad Reed sits down with Desiree Fixler (former chief sustainability officer at DWS), Tim Mohin (chief sustainability officer at Persefoni), and Erik Becker (senior vice president of corporate development at Arcadia) at the GreenFin22 Conference in New York City to discuss why “green” financial products and labels are ineffective and why actually counting carbon levels the playing field for investors and consumers alike. 


Links:

GreenFin: The Premier ESG Event Aligning Sustainability and Capital Markets

Article: Deutsche Bank, DWS Raided Over Allegations of Greenwashing (Bloomberg, May 31, 2022)

Article: The ESG Mirage (Bloomberg, December 10, 2021)

Article: The Secret Diary of a ‘Sustainable Investor’ – Part 4 (Epilogue) (Tariq Fancy, June 2022)

Article: Supreme Court Strips Federal Government of Crucial Tool to Control Pollution (The New York Times, June 30, 2022)

Article: Re: File No. S7-10-22: The Enhancement and Standardization of Climate-Related Disclosures for Investors (Jeffrey W. Eckel, June 17, 2022)


Episode recorded: June 28, 2022

Episode Transcription

Chad Reed: This is Climate Positive – a show featuring candid conversations with the leaders, innovators, and changemakers driving our climate positive future. I’m Chad Reed  

Hilary Langer: I’m Hilary Langer.

Gil Jenkins:  I’m Gil Jenkins.

Desiree Fixler: Just because a company hires a sustainability officer or makes a net-zero pledge or has a human rights policy, that is not the same as an outcome, as an action. We need to be evidence-based, we have to be as painfully accurate on non-financial disclosure as we are on financial disclosure. Too often you just slap a green label on a product or a service. But misrepresentation is misrepresentation, it doesn't matter what the strategy is.

Chad: With the meteoric rise in net-zero commitments and “green” capital raises by corporations and financial institutions, investors and consumers are wondering if these statements are credible. Do “green” labels actually accelerate the flow of capital to companies and projects seeking to improve our climate future? 

In this episode, Chad Reed sits down with Desiree Fixler (former chief sustainability officer at DWS), Tim Mohin (chief sustainability officer at Persefoni), and Erik Becker (senior vice president of corporate development at Arcadia) at the GreenFin22 Conference in New York City to discuss why “green” financial products and labels are ineffective and why actually counting carbon levels the playing field for investors and consumers alike. 

So live from New York, it’s Climate Positive.

Hilary: Climate Positive is produced by Hannon Armstrong, a leading investor in climate solutions for over 30 years. To learn more about our climate positive journey, please visit HannonArmstrong.com.

Chad Reed: Do green labels actually accelerate the flow of capital to companies and projects seeking to improve our climate future? This session will dive into why specific green financial products and labels are perhaps ineffective and why actually counting carbon levels of playing field for investors and consumers alike. First I'd like to ask each of our esteem panelists to introduce themselves telling us a little bit about their current role and company organization and their career background. Eric, go ahead.

Eric Becker: Yes. Thanks, Chad, for having me, it's great to be here. My name's Eric Becker. My career has been involved in building technology companies. For the last nine years, I've been involved with a company called Urjanet. We recently in the last two months actually merged it with Arcadia Power, but our innovation is a technology platform that aggregates utility data from 9,000 different utilities in 52 countries around the world, electric, gas, waste, and water providers. We aggregate this information and sell it to large enterprise customers, companies like Cox, Dow Chemical, and Honda, and they use this information to make their facilities more energy-efficient.

They use this data to publish sustainability reports and for various other purposes. I should also say that a number of the vendors that are at this conference like Persefoni and others are partners of ours. Excited to be here. Thanks very much.

Chad: Desiree.

Desiree Fixler: Hi there. I'm Desiree Fixler. There have been some recent press reports that I blew the whistle while I was chief sustainability officer at Deutsche Bank's asset manager DWS. That is very much a story about corporate governance failure. What had happened is I felt there was a contradiction to what the company was publicly stating and to what was internally stated and known, and spoke up about that, ultimately got fired, came out in the press, and global regulators decided to investigate.

It's culminated with a 50-person strong police raid at Deutsche Bank's headquarters and the CEO stepping down and also the asset manager, which is a publicly listed company, taking a 25% hit on its market cap. It's a phenomenal story, but again, pulling it back, it is about misrepresentation, about corporate governance failure, what I saw as an attempt to exploit ESG. My background aside from whistle-blowing has been in the asset management industry and investment banking. I previously worked at Merrill Lynch, Deutsche Bank, and JP Morgan and lived through the great financial crisis. I was a CDO structurer and there were remarkable parallels to, again, the bubble, if you will, the build-up to that crisis.

Really, where I think we are right now in ESG, and one publication, I think, it was the FT said, questioned whether or not I popped the green bubble, but I think we're all here because we know we need to get back on track. We need to evolve and we need to have these more sensitive conversations about the impact that we're having in this market.

Chad: Thanks, Desiree. Tim?

Tim Mohin: Remind me never to go after Desiree on the introductions. I can never top that. That's amazing. I want to hear more. Hi, everybody. I'm Tim Mohin. I have been around the sustainability business a very, very long time, breaks down, what, 10 years in government, 20 years in the private sector, big tech, Intel, Apple, AMD. Last four years I was CEO of the Global Reporting Initiative, which sets sustainability reporting standards used by most companies in the voluntary market.

Now I'm chief sustainability officer for Persefoni, working with Urjanet and working with many of you to basically provide enterprise-level carbon accounting that can be audited, assured, and used for not only compliance but to really manage the carbon risks throughout an enterprise or financial services institution.

Chad: Thanks, Tim. I'm Chad Reed. I lead strategic initiatives and ESG for Hannon Armstrong. We're a climate-positive alternative asset manager focused only on projects and real assets that improve our climate future. We have about 9 billion of assets under management in various asset classes, including wind, solar, storage, building efficiency, and other sustainable infrastructure assets. Let's jump in. Nowadays it seems like everybody wants to be green or at least net zero. On the investor side, there are over 200 asset managers with approximately $60 trillion in assets under management that have committed to achieve net-zero alignment of their portfolios by 2050 or sooner.

On the corporate side, there are more than 5,000 businesses that have pledged to cut their greenhouse gas pollution to zero by 2050, or reach net zero by canceling out emissions with carbon offsets or other projects. They include some of the biggest companies across a lot of sectors, Apple, Zurich, Procter & Gamble, General Motors, et cetera. The breadth and depth of the investors and companies setting these targets is impressive, and the intentions, if genuine, are certainly laudable, but serious questions have been raised as to the credibility and the achievability of many of these targets.

Desiree, I want to start with you, you mentioned your role as head of sustainability at DWS previously and on the whistle-blowing that you were able to achieve there. Can you tell us a little bit about what we mean by “greenwashing” in this context, and then a little bit about your experience at DWS and how that plays into this?

Desiree: Sure. To begin with, I think during COVID we had an incredible acceleration in the ESG space, and it's what folks wanted to hear. It pulls at the heartstrings and it seemed like every corporate executive was making a net-zero pledge or stating that diversity was the number one priority for the firm. Where we are today, fast forward two years later and all of the regulatory actions and enforcement actions that have happened. It's the wake-up call that we need to be evidence-based, we have to be as painfully accurate on non-financial disclosure as we are on financial disclosure. Too often, we get confused between inputs, initiatives, and outcomes.

Just because a company hires a sustainability officer or makes a net-zero pledge or has a human rights policy, that is not the same as an outcome, as an action. I think that's where greenwashing comes out. Too often you just slap a green label on a product or a service. You say that you're conducting your risk assessment system, investment process integrates ESG criteria, but we don't have enough disclosure, and greenwashing kicks in when we're just thinking that there are no rules and guidelines, there's no standard. I hear that all the time, "Well, there's no standard definition of ESG," but misrepresentation is misrepresentation, it doesn't matter what the strategy is.

This could be crypto, fixed income, it just so happens that we need to have that same rigor in company and product and service disclosure as we do on the regular way in traditional and how we traditionally report. The greenwashing will come up when again, you haven't backed up your products, your services with that evidence and data. Too often, we've seen here that companies were just relying on it as a fundraising machine and a PR exercise, and we need to dial back that, well, the rhetoric and propaganda and go back to just tracking as much data as we can and just being as transparent as we can.

If the product has a transition strategy, it's not good enough just to say, "We the asset manager, we're engaging with our corporations, we've had 2,000 meetings." That's great. What have you achieved? That's like how many AGM motions have you put out there in support of climate? What's your voting record like? What are your lobbying activities like? Is the firm fully aligned? Does the left hand know what the right hand is doing? The company itself has to be authentic about its statements, its actions, and I think it's all about data and being evidence-based.

Chad: Thanks. What exactly happened at DWS? Can you talk a little bit about that or do you have an NDA in place where you can't?

Desiree: Let me also make this statement that there are a lot of good people at DWS and at Deutsche Bank. This was just what I had seen as a top management issue. For me, my eyes were open, I was brought into a firm that had some problems and had a couple of decades of problems. I really thought that I was there to help solve the issues and that I'm generally known to be pretty outspoken. They knew what they were getting. I had worked at Deutsche Bank back in the day. This was about misrepresentation. I was one of the editors on the annual report, a legal document that was a combined report, a financial disclosure, a non-financial disclosure.

I was in charge of editing everything that went out on sustainability. The numbers that were being produced at the majority of the assets under management were aligned with an ESG strategy was just untrue. To begin with, we had no tracking system. How could you report out on a number when there's no internal tracking system or measurement system? There were other exaggerations on-- the ESG risk assessment system was severely flawed. That was one of the first things that came out. I don't know if folks are familiar with the Wirecard scandal, but this company that its CEO was arrested, and they had a 2 billion hole, and the company filed insolvency.

When insolvent, this company, at this time, was given the second-highest ESG rating, citing its strong corporate governance and business ethics, and the CEO's in jail. There are flaws here and it wasn't that I was that astute. It was just there were glaring issues and it wasn't a people's issue. It was that I think the senior management thought they could take a shortcut here that in ESG, you can just say it. You just say you're a leader in ESG and the sell-side equity analysts start talking that you're an ESG leader. You have your A+ in strategy and governance from the PRI, you've got all these great ESG credentials.

Suddenly you're attracting all these great ESG flows and because of the sell-side analysts saying like, "This company is well-positioned to benefit from ESG investing boom," your share price starts soaring and it becomes self-fulfilling and you don't have to do it. You could just say it. It's all about like we live in this market on self-reporting. A lot of the ESG assessors don't kick the tires, they just take the company statement face value. I was internal and I knew that the public statements and the numbers that were being put out, it was not the case. The majority of the assets under management did not comply with an ESG strategy. For me, this was governance.

I'm FINRA trained. This was just exaggeration, misstatements. I redlined the annual report and corrected everything, and a couple of weeks later I was fired and the annual report went out with all the misstatements. This is very much about misrep and misselling the company's reporting of ESG assets undermanagement and also its ESG overall capabilities and profile.

Chad: Well, thank you for your courage and for sharing your story and we did not pick on just DWS, a number of banks and asset managers are now under investigation by US or European authorities for similar sorts of misrepresentations. Tim, I'd like to bring in you now. Before your current role at Persefoni, you were the chief executive at the Global Reporting Initiative, or GRI, the world's largest sustainability reporting standard.

As you well know, the NGO and private sector proactive efforts to push investors and companies to make genuine and meaningful climate pledges to drive real emissions reductions is in part driven by these independent climate and ESG standard-setting agencies and organizations. In addition to GRI, there's a number of them out there. SASB, TCFD, the newly formed ISSB, and there are a number of independent raters, like MSCI and Sustainalytics and increasingly the big credit agencies like Moody's, S&P, and Fitch are involved in ESG ratings. Tell us a little bit about the role of these organizations in identifying and then combating greenwashing.

Tim: Sure. I'd love to, but before we geek out on the alphabet soup, I just want to say thank you for your courage. We need more people that are willing to stand up and pay the consequences, frankly, to really get at this issue in a serious way. Thank you.

[applause]

Tim: What a great story, but let me answer your question this way. I've been around this for a very long time, and I think we're actually heading into an accountability crisis because when I started my career, we didn't have the word sustainability. If you wanted to work on the environment, you chose government or NGO, corporations were not to be trusted. They were to be regulated. Somewhere along the way, corporations moved faster than governments on meeting and exceeding regulatory requirements. The whole corporate sustainability movement was born, corporate social responsibility. You probably all remember that. I transitioned into that. That was a big part of my career.

It's wonderful when companies do something that they're not told to do. It's a man bites dog story. We're going to do something against our better interests because it's good for people and the planet, but if you really step back from that, it's become somewhat of a reputational exercise. A lot of companies do this and I'm not saying they're not good things. Companies do good things and I've seen that firsthand, but because it is a reputational exercise, primarily, it's not taken that seriously. We had a statistic the other day that 92% of the S&P 500 publish sustainability reports.

The vast majority of those reports are unaudited, unassured, and frankly, I think living on borrowed time because behind the curtain, regardless of the alphabet soup of standards, the accounting is done on spreadsheets by overworked, underpaid people. Often the reporting is done late, often six months late after the close of the fiscal year, and it's very spotty. That's why we're seeing this big influx of standards and regulations is to clean that all up. Overall, I don't want to be overly pessimistic. I'm actually somewhat optimistic because I've worked in this field for so long and it's about time.

It's about time that we took this seriously, held companies and financial institutions to account for their statements made. If they're using standards, great, but show your work, show us how you got to those numbers. Otherwise, it's just all smoke and mirrors.

Chad: Tim, one challenge in conducting these assessments on the environmental side is that there's often a conflation between fighting climate risks and fighting climate change. Bloomberg Businessweek recently published an excellent exposé pointing out that MSCI's climate score measures exposure to climate risk, but not at all the impact of the business operations and/or investments to contributing to or mitigating climate change. How can we encourage this alphabet soup of standard setters and rating agencies to properly assess both of these, especially the latter?

Tim: I think what's at the core of your example, and it's a very good one, is this notion of materiality. The definition used in the financial sector is what's material to an investor? What are the risks and opportunities that a reasonable investor would want to know? But that's very myopic. It's really about what's good or bad for the company. What the sustainability side has always had is a broader view. Not only what is good or bad for the company, but what's the company doing to the world around it? This is called double materiality.

This is actually turning into a crisis right now because if you follow this area closely, you will have seen that last week, the European Union came up with something called the Corporate Sustainability Reporting Directive, CSRD. The CSRD, for those of you who spend a lot of time on this stuff, is based on double materiality. All of a sudden you have the world's largest trading block affecting 50,000 companies. You don't even have to be domiciled there. You just have to have business there. That are saying, "Look, it's not good enough to report on what matters to you. We need you to report on what matters to all of us," and that's huge. Europe's the world's largest trading block. That's huge.

At the same time, what's happening in the international level is you're seeing single materiality really take off. The ISSB, we've talked about that all day, the International Sustainability Standards Board. It's solely based on what a reasonable investor would want to know. We're essentially heading into this two-pillar system where you're going to have double materiality and single materiality. Is that a good thing or a bad thing? I don't know. What I do know is that those two things should not be a zero-sum game. They should not be facing off one against the other. If you really think about it, single materiality is a subset of double materiality.

If your company is reporting on these matters, climate being the first one people think about, the reporting of what is financially material to your company should be identical to what is required in a double materiality setting. It's only that additional stuff that matters to people on the planet that should be added on.

Chad: Exactly. Eric, I want to bring you into the conversation now. What roles are private companies like Urjanet, recently acquired by Arcadia, have in ensuring that investor and corporate emissions are properly measured and reported?

Eric: That's a good question. I did want to start off because I-- just comment on mostly what Desiree said. I think as I step back and I look, it's been the last couple of years, there have been tremendous gains in the whole ESG movement. Perhaps one of the biggest risks that the movement faces is stuff that it can control itself, greenwashing, and other things. There are a lot of people who probably aren't supportive of the ESG movement. They look for an opportunity to take this initiative down. I think this is a really important moment for the industry. What we're trying to do to help businesses is help them with real data that's substantiated by source documents and it's irrefutable.

The other thing I would say, you talk about double materiality. When we work with enterprise customers, they're focused on the double green, which is they want to be sustainable, but when you reduce your carbon emissions, you're reducing your consumption of electricity and gas and you're also saving money in the bottom line. We're very focused on providing our customers with real data that they can use, not only to save money but also publish sustainability reports that are irrefutable.

Chad: Tim, what about Persefoni and its role in this effort? Can you specifically address how Persefoni is working with companies and investors to properly report, especially financed Scope 3 Category 15 emissions?

Tim: I said I wasn't going to geek out, but we'll go for it anyway. It ties into what I was talking about before. In all the years I worked at even those big progressive companies, Intel, Apple, AMD, we had spreadsheets running around trying to figure out what all of our emissions were in terms of greenhouse gas emissions. This is just not going to cut it. It won't cut it when it comes to financial statements that have to be filed on time, they have to be audited and assured. Essentially what we do is we've automated the entire process. When you really think about carbon, it's a data problem.

There's nobody chasing around behind your car with a monitor or behind your plane with a monitor to figure out what the GHG emissions are. It's a calculation. You figure out how far you went, what business class or regular class, and then you do a calculation based on emission factors. We've basically automated that whole process across all corporate transactions. It's an ERP, an enterprise resource platform, for carbon. We sit alongside the other ERPs like SAP or Oracle and all the transaction data they create flows through our system. We've basically encoded the whole 1,800 pages of the greenhouse gas protocol.

All the rules, the accounting rules, the calculation formulas, and we have over 107,000 emission factors are just automated. All we have to do is take the data in, and you get a real-time Scope 1, Scope 2, and Scope 3 carbon footprint.

Chad: Excellent. We've actually had discussions with Persefoni on how we could potentially work together on what are called Scope 4 emissions. What I know some people in the audience are interested in which are the avoided emissions associated with especially investments or financed assets. The problem here is that the GHG protocol doesn't actually have a standard for Scope 4 emissions, but we at Hannon Armstrong have a metric called CarbonCount that we've had since we've been a public company in 2013, and there, all of our investments are almost all of our investments in the US.

We take a look at the EPA emission factors, and then we take a look at the megawatt-hours of energy produced (if it's a renewable energy asset) or megawatt-hours of energy saved (if it's energy efficiency asset). Then we divide that product by the total capital cost of the project. That gets us a metric called CarbonCount, which measures the metric tons of CO2 avoided per thousand dollars invested. We've been working to even improve this metric going forward with a concept known as Locational Marginal Emissions.

We have a partnership with a company called REsurety, which has locational marginal emissions associated with two different independent service operators or ISOs, which are basically just small little grids that make up the US grid. This allows us to look at avoided emissions not on an average annual basis, but on a very granular, hourly basis based on where the project is specifically located. We're helping to promote this idea of CarbonCount of reporting on and measuring Scope 4 or avoided finance emissions as a result of investments because we think that it will help drive capital to the types of projects and assets that need that capital.

That's one solution that we're helping develop, but I want to talk about how public policy can help to combat greenwashing as well. Desiree, as you well know, the SEC has released a few proposed rules, one on naming ESG or climate or green investments, another on how do you properly report your emissions. Could you tell us a little about these proposed rules and how effective you think they can or will be?

Desiree: Sure. I think it's fantastic. Just to take a step back. Europe and the US differ a great deal when it comes to ESG regulation. From Europe's perspective, the EU issued I think like 180 new rules back in 2018, which are gradually being implemented and it's based on mobilizing private capital into sustainable investments. It's about the green deal. That's why Europe is very focused on certainly double materiality and its taxonomy and going back and forth. Is nuclear good or bad, is it green? The US approach is very, very different. The US is very much, you know, about investor protection. Ensuring that there's clear risk disclosure investors know what they're buying, what they're investing in.

Secondly, ensuring that there is a functioning financial market. I take the view that when it comes to corporate disclosure, we need standards. I think what the ISSB is doing is fantastic. These initiatives on both naming and risk disclosure and description disclosure. There's all this ESG jargon, what does it mean? I think that that is a fix for greenwashing, but that's not everything. What the SEC also does very well that Europe doesn't do all that well is enforcement. One of the best things it's important to regulate the market, but also tell the market that the regulator is watching and will pounce.

Having lived through the great financial crisis, nothing raised the bar better than hearing about a firm that got busted or is someone going to jail, the Jesse Litvak case in 2014. Everyone in the markets just raised the bar on better practice. I think what the SEC has done with its two enforcement actions, and now the German federal police, I think that those enforcement actions will go further at deterring and mitigating greenwashing than 180 new rules by the European Union and all of that, going into that detail, because it's at a very high level, it's that again, we have to change the mindset to go and become evidence-based and data-based.

I'm all for the SEC approach to clear product descriptions and the naming rule because all too often we see ESG in a name or climate action or this one I love. It's aligned with the Sustainable Development Goals, SDG in there. Then when you lift up the hood and you look in, its investments in like Apple, Microsoft, great, great companies that might be a high-performance portfolio, but is that really SDG aligned? We need to, again, be clear with the names and with what we mean by ESG integration and so forth. I think the US approach is a great one.

Tim: Can I just jump in on that because I think what Desiree is saying is so important. Regulation is a lagging indicator. Something has to happen before regulators wake up to the fact that, "Oh my gosh, we should do something." It's rarely proactive, and your point about the DWS case is so well taken because I think the whole industry has woken up to the fact that these claims have to be real. Regulators are just now following up on that on a personal level. I worked at Apple when Apple was on the front page of the New York Times and every other paper for alleged poor conditions and actually more than alleged in their supply chain and I became the guy in charge of that. Fast forward, Apple's a leader in that space and changed the entire industry. I think that your point is extremely well taken. It's that shot across the bow that leads to this change.

Chad: One concern I have is whether the courts, the federal courts will uphold the regulations that the SEC are putting out now. We're likely to get a ruling tomorrow on the authority of the EPA to regulate certain greenhouse gases under the Clean Air Act. I guess we'll see how far the Supreme Court is willing to go on that issue. Given they've been very active recently. Tim, Desiree did mention some of the weaknesses of the European regulatory regime. Can you defend it? Can you give us any hope that the European leadership whether it's through the corporate sustainably reporting directive or the EU taxonomy can provide some value here in the ecosystem?

Tim: It's necessary, but not sufficient. I think to be super candid, some of the European style is regulatory overreach. You see a cycle of regulation compliance and nothing really changes beyond that. I think you really have to have somebody on the other end of the transaction, and in this case, that's investors that can actually move the needle. If we're saying that transparency leads to change, great, just reporting your information to a financial regulator leads to no change whatsoever. What leads to change is that that information is used by investors to align capital to sustainable business practices. If that doesn't happen, then what are we doing? We're just adding compliance costs.

That's why I said by overreach, I mean, there's just so many different aspects from CSRD to SFDR to the taxonomy to the EFRAG. I mean, we could keep going, but eventually, at some point, there has to be a transaction. Somebody provides the information, somebody uses the information, and that change happens, and that's what I'm kind of looking for.

Chad: Eric, what new opportunities do these proposed regulations have for companies like yours? How does your company think these regulations should be shaped going forward?

Eric: I think it definitely raises the bar on what they have to do, and foundational to all this is the data that we're focused on. We are really trying to provide corporates and innovators in the space with a data platform that kind of supports everything they're trying to do to accelerate this movement towards the new energy economy. When we engage with enterprises, we engage with them at different points in their journey.

There are some Tim talks about people with spreadsheets. For them, again, it all starts with getting the data. They may be using spreadsheets at the outset, but we'll engage with them to build a foundational data layer that they can use. We engage with others that are much more sophisticated and further along in their journey where they're actually capturing data, but they might be doing it with manual processes and we bring automation to that. We view our role to accelerate this change, the new energy economy is providing really the foundational clean tech platform to enable all that.

Chad: Excellent. Well, I also want to talk about public policy as it relates to the elected branches of government and the role of corporations in engaging with them. One of our favorite public intellectuals, Tariq Fancy, who is the former CIO for sustainable investing at Blackrock, has written extensively on this topic. He notes that BlackRock, Disney, Boeing, Netflix, four very large US major corporations, all eagerly post all kinds of information on their great CSR work and their ESG profiles, and yet, all four have fought against shareholder resolutions asking them to publicly disclose their political spending, which after the Supreme Court's Citizens United decision makes it effectively secret and limitless.

One thing I want to bring up is what role do corporations have? Should they be disclosing their political engagement, lobbying, spending, and how would that potentially impact the broader ecosystem of our elected branches when it comes to these sorts of rules and regulations? I will start with you, Tim.

Tim: We're wading into the deep water now here. [laughs] Having worked in companies for a very long time, it's super difficult to hold them accountable to this standard because in many cases, the contributions they're making are to either a member of congress or an association that supports them on a broad range of issues. One of those issues runs counter to the policies you were talking about. It creates a dilemma within the company like, "Well, do we pull back the entire money because of this one thing, or do we go forward?" That's where you end up with these inconsistencies, which are gleefully pointed out by just about everybody. It's a tough one. I think that one is super tough for companies to step up to.

However, I'm going to just say that I think companies are now-- I mean, we've called it “brands taking stands”, are now sort of taking on the role of government with this Supreme Court that you've mentioned before, which is, let's say, moving beyond the known barriers of the Supreme Court. The Roe vs Wade decision, just from last week has caused corporation after corporation to say that they're going to fund employee travel to get necessary services now, including, I'm very proud to say Persefoni. That's going to continue to happen as governments take these steps.

I think companies are now being held to a higher standard and it's probably going to start to impact their political giving as well because it's kind of the last thing, but again, very difficult for companies to step up to that one.

Chad: Desiree, Eric, any thoughts on that?

Desiree: I mean, I agree with what you said. The only thing I would add is that if a company is wading into an issue, then you have to go all the way and disclose. Again, it comes down to if you're saying something, if you're involved in an activity for generating if we're making money off something, then make sure that you're aligned. You're inviting that disclosure. That's the only thing I would add.

Eric: I guess I don't have too much to add. It is a complicated question. I would just say, if you want to drive behavior, it's all about incentives, and there can be the carrot and the stick. I think that when you think about that and try to answer these questions, I don't have a great answer to it, but I would say think about the incentives and focus on those and you'll drive the kind of behavior you're looking for.

Chad: Hard to disagree with that. I also want to touch on the backlash to ESG. There's been a number of statements made recently, one by Elon Musk that questioned the value of ESG writ large because Tesla was kicked out of the S&P ESG index while I believe ExxonMobil remains. Then, on the potentially other side of the spectrum, a number of states (Ceres does a great job collecting this information) are proposing legislation that would prevent their state pension funds and other firms within their domiciles to consider ESG factors when making investments. Where does this end? Where is this going?

We're seeing a backlash to ESG in part because of the SEC's actions, I believe, and in part because of an ideological view that companies should only focus on exclusively the bottom line. Where do you see this going? Tim, I'll start with you.

Tim: Well, it comes down to what my fellow panelists Eric and Desiree have been saying. It comes down to data accountability and transparency. These things that we're talking about, the 34 topics under ESG, can be measured, can be disclosed, and frankly need to be. Right now, like any movement, it's a little messy. There's a lot of chaos at the beginning of any movement, but I always like to make the comparison to ESG to the famous Hemingway quote about bankruptcy. It was a very gradual process, and then it happened all of a sudden. This is what's happening in ESG. I've been in this field for so long, and all of a sudden, it's very, very important.

This is why I said it's an accountability crisis because these-- let's just say behind the curtain kludge systems that we have, are being exposed for what they are and that's going to take a little while to shake out. Now there's some real risk, especially in the analytics space that you mentioned before. I think about the mortgage meltdown when some of the firms that went bankrupt were rated AAA just a few weeks before. You have a situation developing in the ratings and rankings space where because of the lack of transparency, because of the lack of rigor in the information, you're seeing all kinds of also somewhat false ratings and rankings on companies' ESG statements. This must be solved.

IOSCO, the international securities regulators association basically have said that's their next target for regulation. It's a little bit of a mess right now, but I do think it's getting better.

Desiree: I absolutely agree. This market was so one-sided and everyone was taking selfies in Glasgow COP26 and how wonderful, and GFANZ the statement, "We've mobilized $130 trillion or euros in support of climate action," and emissions are going up. We needed to mark ourselves to market, and I think these recent, the criticisms, the regulatory actions, proposals, the enforcement actions, I think that's what we needed to have more honest conversations. Secondly, while we've been successful in mobilizing trillions of dollars into this ESG space, how will we move the needle? Is this impactful money? Our emissions are going up, so whatever we're doing, we're not moving in the right direction. I think this point in time, this accountability crisis, it's healthy to have authentic, sensitive conversations and address the structural weaknesses here to do better.

Eric: Yes, it is a seminal moment in this sort of-- it's a messy point in the ESG movement, and it's an important time for all of us in industry to step up and encourage the type of future that Tim's alluding to.

Chad: Absolutely. With that, I do want to open it up to audience questions. If you have a question, feel free to stand up and we'll go from there.

Monique: Hi, everyone. Thank you so much for such a robust conversation. My name is Monique. I'm an emerging leader and a graduate student at Brandeis University. Eric had mentioned that markets are motivated by incentives. What incentives do you think are necessary to increase the adoption of a double materiality framework? Do you think that comes solely from regulation or do you think there are other points of leverage?

Tim: That is a tough one because ultimately it is going to be about regulation because the definition of double materiality is impacts that go beyond the company's financial wellbeing. As you know, public companies are held accountable by their shareholders every 90 days, and it makes it really tough for them to think about anything else, and so regulation is required in that space, but I wouldn't stop there as a former regulator. I think that sometimes we put too much stock and faith into just disclosure. I said it before, but unless there's action that follows that disclosure, it's a waste of time. Data is only useful if it's used.

Sometimes I feel like we're going the long way, especially with climate change. We know where it comes from, just regulate it. Go after methane, go after power plants, and this EPA thing that was mentioned by Chad has me staying up at night. Truly believe that it's a part of the story, but it's not the whole story. I do think that you're going to need regulation to continue the fire under double materiality.

Cory Weiss: Hi, this is Cory Weiss from SVB. Thanks for this great conversation and maybe have a little bit of a boring, buzzkill question, but the accountability crisis is real. The data gaps are real, and for us to report against the SEC proposal at the scale that we need, we're going to need to rely on software platforms to really do this at scale. Can you talk to us about the auditability of the software programs of Persefoni? How can we unpack the methodologies and the data that's necessary to ensure that scope one and two data that's being reported, let alone scope three, is reliable?

Tim: Yes, 1,000%. The key to the accountability crisis is auditability. I think the Big Four are, gosh, if any of you have any ESG experience and can fog a mirror, you can get a job right now at a Big Four company, they're staffing up. They see what's coming. It's essential to everything we do. I think Desiree started the conversation off that way. Thank you for doing that. In terms of the role of software is just to enable that process. At Persefoni we provide a ledger. Every single transaction that had the emission formula, the emission factor, I should say, plus the accounting formula applied is reported in a ledger that can be then followed back to the source of the information with a name and a timestamp. Completely assurable auditable all the way through and completely transparent.

Eric: Then I'll just add on, again, our role and this is all in the data piece of it. We try to enable these software platforms with data that comes direct from the source. It's electronic. We provide the source documents around this for auditability, and so we see that as our role providing the data that all these types of software platforms need to do the types of things that you're describing.

Chad: I think we're almost at time. For each of our panelists, what is one final takeaway on greenwashing on regulations that you would want every member audience to remember going forward. I'll start with you, Tim.

Tim: Persist. Never quit. We've been in this field for a long time. We've seen the ups and downs, like I said, it's never been more dynamic than it is now. There's some big headwinds, dark clouds on the horizon keep me up at night, but 35 years later, I'm still here. Persist.

Desiree: Yes, I absolutely agree. I would say that, again, look at the macro-economic outlook is not very pretty and it comes up, but I've been asking quite a lot, are we going to see outflows in ESG, whether it's performance-related or companies no longer invest because of the inflation issue and cost issue? I agree that, look, we're going to move into a very challenging time because ESG, there's the accountability crisis. It's messy. We've got macroeconomics, severe headwinds coming at us, but it's necessary. I'm very encouraged with the reporting standards.

I absolutely think that is going to happen. There's a generation shift and younger generations are very values aligned and it's a whole new, what we learned with, unfortunately, energy security is that while short term there might be more fossil fuel investments, long term we can't be dependent on fossil fuel autocracies. We have to do this also for energy security, and it's a whole new economy that wonderful investment opportunities and hiring opportunities. I'm encouraged with the science, but we're heading for some choppy waters here.

Eric: I guess the last thing I'll add onto this, just sitting here at the conference for the last day is that we talk a lot about how hard it is and all the challenges, everyone lives and breathes this. Everyone in this room I think is involved in that. I guess what I'd say is that it's worth it. Climate change as we all know is real. It's existential. As challenging as this is, and all of us are involved in it, it's worth it. The final comment I'll make is that I walk away today being optimistic. I've met with a lot of really bright, really motivated people today, and we're all involved in making all this happen and so I walk away from having met with many of you, very optimistic about what we can do together.

Chad: That is the perfect note to end on. Please join me in thanking our panelists today.

[applause]

Chad: If you enjoyed this week’s podcast, please leave us a leave a rating and review on Apple and Spotify.  This really helps us reach more listeners. 

You can also let us know what you thought via Twitter @ClimatePosiPod or email us at climatepositive@hannonarmstrong.com.

I'm Chad Reed. 

And this is Climate Positive.